I always shoot (mind you I'm a good shot and always have my gun at center mass level in CQB so I always hit armor)
I've seen and heard alot of people winning one of those encounters just because they said "mercy" first, even though their gun was down and the other guy's gun was up. The winner should be the fastest shot, not the fastest talker.
The only time I ever mercy someone is when I absolutely don't need to shoot them. For example if I can creep up behind them, or I'm within 10 feet, I'm aiming at them, and they just haven't noticed me.